On September 23, Canada’s Competition Bureau (“the Bureau”) announced  landmark guidelines regarding the consideration of pharmaceutical patent litigation settlements under Canada’s competition law framework. The Bureau’s guidelines on this issue were released as part of a white paper titled Patent Litigation Settlement Agreements: A Canadian Perspective. These settlement agreements attract concern from competition regulators due to their potential to take the form of so-called “pay-for-delay” or “reverse payment” arrangements where a generic manufacturer agrees to delay the launch of a competing generic product in exchange for a transfer of value (monetary or otherwise) from the brand company. These types of agreements are targeted due to their ability to cause decreased competition which leads to higher pharmaceutical costs for consumers.

Summary of the Preliminary Guidelines

The guidelines provide information to the pharmaceutical industry regarding when pharmaceutical patent litigation settlements will draw the scrutiny of either the criminal or civil enforcement provisions of the Competition Act (“the Act”).

Criminal Enforcement Provisions

The guidelines state that the Bureau will likely “pursue” the settlement under the criminal enforcement provisions of the Act (s. 45) if any of the following conditions are met:

1. The settlement includes conduct that goes beyond the scope of the patent (eg. fixing a generic entry date beyond the patent term); or

2. The Bureau finds evidence that the settlement is a vehicle for “naked restraint” on competition or motivated by factors external to the litigation.

Notably, the Bureau also set out that even if a settlement agreement does not satisfy either of the above two criteria, it can still can be reviewed under the criminal enforcement provisions of the Act.

Civil Enforcement Provisions

If the Bureau decides not to review the settlement under the criminal enforcement provisions, the agreement can be examined under the “civil” enforcement provisions of the Act (s. 90.1 and 79).  Generally, agreements that will draw scrutiny under these provisions must have the effect of causing a “substantial prevention or lessening of competition” (“SPLC”). An agreement may be found to be causing an SPLC if, but for the settlement, the parties would have been likely to compete through the exercise of market power in a way that would lead to lower cost alternatives for consumers. One particular factor that was highlighted by the Bureau as important was a determination if the value transfer given to a generic company as part of a settlement is larger than the patentee’s litigation costs and potential liability for “section 8 damages” under the PM(NOC) Regulations. If this is found to be the case, the agreement is more likely to cause a SPLC and draw scrutiny under the Act.

The Bureau’s Guidelines – Are They Feasible in Canada?

Various commentators have put forth concerns and criticism regarding the Bureau’s apparent willingness to expansively consider these settlement agreements as per se criminal. This approach has been noted to be very different than the more holistic “rule of reason” evaluation of pharmaceutical patent litigation settlement agreements that was established by the US Supreme Court in Federal Trade Commission v. Actavis (summary of the decision). An unfairly harsh or uncertain competition law framework is certainly a valid concern and an undesirable output for the Bureau.

In addition, one could argue that the Bureau’s intention to evaluate section 8 damages as part of their consideration of settlement agreements is impractical given that the quantification of these damages is still a live and contentious issue for even the most experienced Federal Courts. Therefore, it is a valid question if the Bureau would be able to appropriately evaluate settlement agreements on this metric, and it may even be the case that this exercise is simply beyond their competence as an administrative body. This is another valid concern that stems from the current form of the guidelines.

Although these concerns exist, their presence should not stop the Bureau’s commendable efforts to prevent anti-competitive practices in order to curb ever-increasing health care costs. However, it must be recognized that an impractical, unpredictable, or overzealous scrutiny of settlement agreements in this sector may lead to the discouragement of litigation settlement which has the potential to do more harm than good. Although certainly having great intentions, the Bureau must continue to refine its approach to creating a feasible and effective competition law enforcement framework in this area. On this very complex issue, like many of its kind, it is certainly not the thought that counts.